Changing the Model

Cisco Systems' Value-Based Approach to Selling

In the year 2000, with sales growing more than 50 percent annually, Cisco Systems, the leading manufacturer of networking products and solutions, decided to throw out its sales and distribution compensation system and build a new one from the ground up.

A critical part of the restructuring was the development of a new compensation system. Up to that point, Cisco, like most businesses, had been compensating its sales and distribution employees and partners according to the volume of their sales. The new system, now in place and widely emulated, rewards the ability to develop new business by helping customers find business solutions using Cisco’s products.

“The fundamental issue that had to be addressed was the compensation system,” said Kirthi Kalyanam, J.C. Penney Research Professor and Director of Internet Retailing at SCU’s Leavey School of Business Retail Management Institute. “The simplicity of the volume model has made it so common, so prevalent, that developing and articulating an alternative was a challenge. If not volume, then what?”

Kalyanam and co-author Surinder Brar of Cisco’s World Wide Channels division have just completed a paper on the transformation, titled “Value Based Channel Management: A Field Study of Cisco Systems, Inc.” Building on the relationships between Santa Clara University and Cisco’s leadership, Kalyanam was able to conduct numerous interviews to better understand what the company was doing.

The channels referred to in the paper’s title are the various means of selling and distributing Cisco’s products and services. These include the company’s own sales staff, distributors, service providers, resellers, and system integrators. A critical part of Cisco’s strategy was to rely more on the channels outside the company’s own sales force, and the approach has paid dividends. Those channel partners now account for 91 percent of the company’s sales.

“Prevailing wisdom has been that a company’s captive sales force typically outperforms the independent distributors,” Kalyanam said. “Cisco has shown otherwise — that it’s possible to get a channel system that works really well.”

A critical element in making that system work is Cisco’s comprehensive training and information program to keep the channel partners aware of products and services and their possible applications. The company offers courses on its web site, certifies its channelers, and in many cases requires annual exams of sales people.

At a very simple level, Kalyanam said, Cisco is trying to do with its sales partners what McDonald’s does with its customers: Ensure a consistent experience wherever you do business. The difference is that the key ingredient related to quality isn’t the meat and bun; it’s the knowledge the seller has of both Cisco’s products and the customer’s needs.

“Cisco is helping its partners provide a consistent level of knowledge-based quality,” he said.

Tied to this approach is a system of specialization incentive payments that are also dependent on meeting customer satisfaction targets. Under this system, a smaller-volume reseller or distributor can still do well by providing significant added value to end customers, perhaps in a specialized area. And the smaller operator won’t be disenfranchised by a volume system that rewards only total sales.

This sort of system, Kalyanam said, is well suited to the high-tech industry, where products and services change rapidly and companies have to adapt quickly or die. Based on accounts in the media, other firms are following Cisco’s lead.

“Rome wasn’t built in a day, and Cisco didn’t get there overnight,” he said. “As the technology evolves, the model keeps changing, but the parameters have been put in place. It looks as if Cisco’s approach is emerging as one of the industry standards.”